Saturday, July 17, 2021
Euro 50 - Sweden 30 - Consequences of a Hawkish Tilt
تم إعداد هذا المنشور من قبل سنشري للاستشارات
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The yield curve started to flatten in the second quarter of 2014 which resulted in the outperformance of Tech sector, along defensive stocks such as Utilities and Healthcare. Sectors such as financials, energy and industrials performed poorly. Along with US treasury spreads narrowing, the Germany Bund spreads (benchmark for European Yields) also narrowed along the same period.
A Multi-Month Trend
The latest economic forecasts released by the Fed in the FOMC meeting for the month of June 2021, 11 of 18 policymakers expected at least two interest rate hikes by the end of 2023. The prospect of those earlier-than-expected moves have soared short-term yields higher while keeping longer-duration yields subdued as market fears of out-of-control inflation subside. Presently, the economy is expected to witness a similar wave like it did in 2014 and thus the tech dominated indices in the EU zone should fundamentally outperform the indices that are dominated by the financial sector. This could be a gradual and a multi-month trend.
The Pair Trading Strategy involves going long on Euro 50 increasing in value and simultaneously holding a short position on Sweden 30.
Along with the generic outlook of the Technology and IT sector rallying, the core reason for Euro 50 to surge is mainly because the major constituents of the Euro50 index are from the Consumer Discretionary sector followed by Technology and the index also comprises of blue-chip European companies from dierent sectors. The consumer discretionary sector that has a weightage of 28% in Euro 50 is anticipated to perform well with reopening of the European economy.
Whereas in the Sweden 30 index, 58 percent weight is allocated to the Financial and Industrial sector cumulatively, and both sectors are forecasted to underperform. The Industrial sector may expect lower profit margins since a cap on inflation implies a cap on sales prices. Additionally, the banking sector will logically witness reduced net interest margins due to narrowing yield spreads in a flattening yield curve scenario.
Euro 50 Sector Constituents
Sector | € Market Cap (In Bln) | Market Cap % |
Consumer Discretionary | 1100.00 | 28% |
Information Technology | 124.57 | 27% |
Communication Services | 517.04 | 13% |
Industrials | 500.05 | 13% |
Consumer Staples | 458.61 | 12% |
Financials | 416.98 | 11% |
Materials | 292.27 | 7% |
Health Care | 200.03 | 5% |
Utilities | 180.38 | 5% |
Energy | 143.71 | 4% |
Communication Services | 118.65 | 3% |
Real Estate | 31.33 | 1% |
Total | 3959.05 | 100% |
Date: 23rd June 2021
Source: Bloomberg
Sweden 30 Sector Constituents
Sector | € Market Cap (In Bln) | Market Cap % |
Industrials | 3210 | 38% |
Financials | 1690 | 20% |
Health Care | 1390 | 16% |
Consumer Discretionary | 788.08 | 9% |
Information Technology | 689.61 | 8% |
Consumer Staples | 321.36 | 4% |
Communication Services | 232.05 | 3% |
Materials | 184.49 | 2% |
Total | 8505.59 | 100% |
Date: 23rd June 2021
Source: Bloomberg
Given the flattening of the yield curve and current sector weightings, Euro 50 index is likely to outperform Sweden 30.
However, it is important to note that Trading pairs is not a risk-free strategy. The jeopardy comes when prices of the two securities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.
Disclaimer: Individual stocks in the index are subject to both weightage recalculation & recomposition risk. As a result, certain stocks may be added or removed from the index upon index recalculation. Consequently, the performance of the relative index may deviate from the one specified above.
Note: Trading Timings (subject to change) –
Euro 50: 00:00-00:15/00:30-01:00/02:00-04:00/04:15-00:00
Sweden 30: 11:00-19:25
(GMT+4)
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Date: 27/6/2021
Arun Leslie John
Chief Market Analyst
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